AMERICAN BAR ASSOCIATION JOURNAL ARTICLE: THE COLORADO LEGISLATURE’S SB 10-001 WILL LIKELY BE FOUND

The Winter 2012 issue of the American Bar Association Journal of Labor and Employment Law includes an article titled: “Public Pension Benefits Under Siege: Does State Law Facilitate or Block Recent Efforts to Cut the Pension Benefits of Public Servants?” The article’s author is Eric Madiar J.D., Chicago-Kent College of Law, currently Chief Legal Counsel to Illinois Senate President John J. Cullerton.

(Note: This ABA Journal article was written prior to the recent Colorado Court of Appeals ruling that Colorado PERA pension COLA benefits are indeed contractual obligations of Colorado PERA and Colorado PERA-affiliated employers.)

Below I provide excerpts from the article of relevance to the 2010 breach of PERA pension contracts by the Colorado General Assembly, (and of course, some of my own observations relating to the excerpted material.)

IN SB 10-001, THE COLORADO GENERAL ASSEMBLY ATTEMPTED TO USE MARKET VOLATILITY TO JUSTIFY THE BREACH OF PENSION CONTRACTS.

From “Public Pension Benefits Under Siege”:

“Rahm Emanuel’s statement after the 2008 election aptly described the current climate: ‘You never want a serious crisis to go to waste . . . [because it] provides the opportunity . . . to do things that you could not do before.’ Thus, for proponents of pension reform the window of opportunity is open.”

(My comment: It is uncanny how closely these remarks from Rahm Emanuel in 2008 track the comments of SB 10-001 co-prime sponsor Josh Penry in 2009 [they both like the word “window.”]

The Penry “Can’t Miss This Window” comments:

“Senator Josh Penry, in a videotaped discussion with Representative Mike May, [videocenter. denverpost.com] said ‘we can’t, can’t miss this window.’ And, . . . we have an opportunity to pass something that Republicans have long advocated, a significant increase in retirement age, which the PERA Board embraced, reigning in the cost of living increases . . .”

“Penry went on to say, ‘I think it is important to pass something because if you lose actuarial necessity, as you know, it becomes extremely difficult to increase retirement age. You cannot change course and this year, when PERA’s investment numbers come out, their investment returns . . . numbers are going to be significant, like double, 15-16% investment return. So that could change the specter of actuarial necessity. We gotta’ do it this year or else these other structural changes won’t be possible.”)

“Second, a legal calculus does not motivate changes portrayed as ‘pension reform.’ Rather, as Eden Martin of Chicago’s Commercial Club candidly explained ‘[this is] not about the law at all, it’s about the politics and arm-wrestling over money.'”

“These two points are significant because they frame our larger discussion of whether the law provides states with a means to achieve a particular political objective: the unilateral reduction of public pension benefits to avoid painful tax increases, service cuts, or both. In Illinois, the answer is unequivocally ‘no'”.

“Most states follow the contractual approach based on court decisions or specific constitutional or statutory provisions.”

“One issue common to all reform efforts is whether those reforms violate the Contract Clause of the U.S. Constitution or its state equivalent. This issue is paramount because pension benefits are essential components of compensation and largely determine whether public servants and their dependents may live with a modicum of economic independence upon retirement.”

“On its face, the (Contract) Clause provides in absolute terms that ‘No State shall . . . pass any . . . Law impairing the Obligation of Contract.'”

U.S. SUPREME COURT: STATE ATTEMPTS TO BREACH THEIR OWN CONTRACTS, IN THEIR OWN SELF-INTEREST, RECEIVE VERY LITTLE DEFERENCE.

From “Public Pension Benefits Under Siege”:

“In 1977, however, the (U.S.) Supreme Court clarified that state attempts to impair their own contracts, ESPECIALLY FINANCIAL OBLIGATIONS, were subject to greater scrutiny and very little deference because the STATE’S SELF-INTEREST IS AT STAKE. As the court bluntly stated:

A governmental entity can always find a use for extra money, especially when taxes do not have to be raised. If a state could reduce its financial obligations whenever it wanted to spend the money for what it regarded as an important public purpose, the Contract Clause would provide no protection at all . . . Thus, a state cannot refuse to meet its legitimate financial obligations simply because it would prefer to spend the money to promote the public good rather than the private welfare of its creditors.”

(My comment: Precisely.)

A STATE’S IMPAIRMENT OF ITS OWN CONTRACTUAL OBLIGATIONS IS UNREASONABLE.

From “Public Pension Benefits Under Siege”:

“An impairment is unreasonable if it targets a known problem that existed at the time of contract formation UNLESS THAT PROBLEM HAS CHANGED IN KIND, not merely in degree. Impairment is permitted only if there are no less drastic alternatives available for safeguarding

the important public purpose.”

(My comment: Colorado PERA has always been well

aware of the “problem” of dips in securities markets. Colorado PERA employs investment professionals who have made a life-long study of market volatility. Having testified before legislative committees for years regarding potential pension reform measures to address the bursting of the “dot-com” bubble in 2001 it is not reasonably possible for Colorado PERA officials to claim ignorance of the “problem” of market volatility. The problem grew a bit larger in 2009, but it did not change “in kind.”

Less drastic alternatives? Here at saveperacola.com dozens of “less drastic” alternatives to the breach of public pension contracts are on the record.

Finally, it should be noted that PERA pension contracts are formed every day of the year under any vesting scenario that PERA might espouse . . . each day many PERA members reach five-year vested status and many PERA members retire.)

THE COLORADO GENERAL ASSEMBLY HAS FAILED TO PROPERLY FUND THE PERA PENSION.

From “Public Pension Benefits Under Siege”:

“(The Colorado case also raises) . . . the question whether cutting benefits is a reasonable and necessary means to protect the pension system when, for decades, the state failed properly to fund the system.”

(My comment: It is satisfying to have the Colorado General Assembly’s habitual failure to meet its obligations to the PERA pension published in a law journal of the American Bar Association. The entire American legal community should be made aware of the negligence of the Colorado General Assembly.

As we have seen, the Colorado General Assembly has skipped $4.3 billion in annual required contributions to the PERA pension fund [as identified by PERA’s actuaries] in just the last decade. News accounts from the 1990s reveal that the General Assembly also traditionally underfunded the pension during that decade. As we have seen, it has been PERA Board policy in the past to underfund the pension [90 percent ceiling on AFR.] Moreover, [and incredibly] members of the Colorado Legislature have, in the past, criticized the PERA pension as “overfunded” when its actuarial funded ratio was at 87 percent.

To wit, in 1985 Colorado PERA’s Field Education Services Division Director Dennis Gatlin stated that: “PERA’s funding ratio was at 87 percent, and legislators claimed that the association was ‘too well-funded.’ In 1970, the ratio was 54 percent, he added. According to Gatlin, PERA has been overfunded, when its assets equaled more than its liabilities, only twice in its 73-year [My comment: now 81-year] history, in 1999 and 2000.”

Here’s a link to Dennis Gatlin’s comments in the Silver and Gold Record:

“The Colorado Supreme Court in the McPhail case . . . observed that ‘a cardinal principle of justice and fair dealings between government and man, [is that] the parties shall know prior to entering into a business relationship the conditions which shall govern that relationship.'”

When all of this is taken into consideration, how is it possible that the Colorado General Assembly might consider its breach of pension contracts in SB 10-001 to be in any way “reasonable”?)

CHANGING THE GROUND RULES IN THE MIDDLE OF THE GAME IS NOT CONSONANT WITH AMERICAN TRADITIONS OF FAIRNESS AND JUSTICE.

From “Public Pension Benefits Under Siege”:

“The (Colorado) retirees sued under the Contract Clause of the U.S. and Colorado Constitutions to retain the higher COLA rate that was in place when they retired or became eligible to retire. Colorado case law appeared to support their position.”

” . . . a 2002 Colorado Supreme Court decision may have indirectly modified it (McPhail.) In Estate of DeWitt, the court held that the Contract Clause of the U.S. and Colorado Constitutions only protects a contract affording a plaintiff ‘a vested right.'”

(My comment: As we know, the Colorado Court of Appeals recently found that Colorado PERA retirees do have a vested right to their PERA pension COLA benefits. Colorado Court of Appeals: “We consider McPhail and Bills dispositive [indisputably bringing to a conclusion a legal controversy] of whether plaintiffs here have a contractual right to a particular COLA.”)

“The deferred compensation analogy (construal of public pension benefits as ‘deferred compensation’) exists as a means to achieve a specific objective. That objective was best explained long ago: ‘Whether it be in the field of sports or in the halls of the legislature it is not consonant with American traditions of fairness and justice to change the ground rules in the middle of the game, [Hickey v. Pittsburgh Pension Board, 1954; accord Colorado Supreme Court, Police Pension and Relief Board v. Bills, 1961.])”

THE COLORADO GENERAL ASSEMBLY USED THE PERA PENSION AS A “CREDIT CARD” TO AVOID TAX INCREASES. THE MOST RECENT MARKET DOWNTURN WAS “A POLITICAL OPPORTUNITY.”

From “Public Pension Benefits Under Siege”:

” . . . public employees have diligently and faithfully paid their contributions while their government employers have failed to pay their required share. Indeed, for decades, states have treated pension systems as a credit card to pay for government services and avoid tax increases or service cuts.”

“Public pensions are under siege because the current fiscal climate in most states presents a political opportunity for change. For lawmakers, it is simply politically more palatable unilaterally to cut pension benefits for public employees and retirees than to raise taxes, cut services, or both.”

(My [extended] commentary: The Colorado General Assembly cannot legitimately blame the constitutional TABOR amendment for limiting their revenue and pension funding options. Nothing prevented the General Assembly from referring a constitutional amendment to the people to address PERA pension funding. Why did the General Assembly not take this step before embracing the breach of its contractual pension obligations? This would have demonstrated “good faith.” Nothing prevented the General Assembly from enacting legislation that would properly place the costs of any pension reform measure on PERA-affiliated employers [who are after all contractually obligated to fund pension benefits.] Instead, as the prime sponsor of SB 10-001 has told us, the bill asked these PERA-affiliated employers to pay a mere 10 percent of the costs of the 2010 pension reform. Nothing prevented the General Assembly from exploring options for increased revenues that could be directed toward pension obligations, from sources beyond TABOR’s restrictions. Why did the General Assembly fail to appoint a study committee to explore potential sources of revenue by which it could meet its contractual pension obligations? Instead, the General Assembly abdicated this role to the lobbyists. One should note that a preponderance of PERA-affiliated employers have already exempted themselves from TABOR restrictions through “de-Brucing.” Most PERA-affiliated employers cannot claim that TABOR presented an obstacle to their ability to raise funds. In fact, just a few weeks ago dozens of Colorado governmental entities succeeded in raising new revenues through ballot measures. Nothing has prevented the General Assembly from historically choosing to place expenditures to meet its contractual obligations above its discretionary expenditures. Nothing prevented the General Assembly from retaining all of its revenues, and directing more of these revenues to meet contractual obligations, instead of making annual $100 million discretionary grants for property tax relief. Further, the General Assembly has been under no legal obligation to historically direct $500 million of its revenues to local government public pensions while ignoring its own PERA pension obligations. Nothing prevented the General Assembly from exploring the issuance of pension certificates of participation and taking advantage of historically low interest rates. The General Assembly was under no obligation to enact legislation under Governor Bill Owens slashing its revenue stream. Nothing prevented the General Assembly from asking its own lawyers to provide a legal opinion regarding the constitutionality of their pension reform proposal [or did they?] Nothing prevented Governor Ritter and the General Assembly from sending an interrogatory to the Colorado Supreme Court regarding the constitutionality of their proposed pension reforms. The Denver Post editorial board encouraged the General Assembly to take this step. Why did the General Assembly ignore this advice? Did the General Assembly simply not want to hear the answer? Or, perhaps it was the lobbyists who did not want to hear the answer?)

COLORADO CASE LAW TAKES A CONTRACTUAL APPROACH TO PUBLIC PENSIONS, THUS, SB 10-001 WILL LIKELY BE FOUND UNCONSTITUTIONAL.

From “Public Pension Benefits Under Siege”:

“The adoption of the contractual approach by Colorado . . . however, make(s) it more likely that pension reform efforts (the COLA provisions of SB 10-001) will be found unconstitutional.”

A PDF of the Madiar paper is available on the website of the National Conference of State Legislatures at the following link: